Merrill Lynch, 28 June 2006
YTL Power International Bhd.
Price Objective: RM2.30
Powered by Water; new Buy
Wessex Water to drive earnings
We forecast YTL Power to post 10.8% earnings CAGR over three years (FY06E- FY08E) driven by Wessex Water. The earnings growth in Wessex Water in turn is a result of increase in price limit by UK Office of Water Services (OFWAT), the UK regulator. The limit has been increased by 3%-8.9% for Apr 2005-09.
Potential beneficiary of overseas and 9MP projects
YTL Power is proactively seeking to acquire value-accretive greenfield or operating power plants overseas. It is one of the qualified bidders for Peaking Power Generation (1,000MW) in South Africa. We believe YTL Power is an underdog in the local water sector, but its expertise in the UK water & sewerage sector through Wessex Water should prove invaluable in securing Ninth Malaysia Plan (9MP) water-related projects. The 9MP has more than doubled its water utility spending to RM16.5bn (US$4.5bn).
Downward pressure capped by attractive dividend yield
YTL Power offers an attractive gross dividend yield of 5.3%, higher than KLCI and regional average gross yield of 4.3% and 3.6%, respectively. Management has the capability to repeat last year's distribution in the ratio of 1:25 treasury shares, which could potentially lift gross yield by an additional 4% points to 9.3%, backed by its accumulated treasury shares of 239mn.
Resuming coverage; Buy with a blended value PO of RM2.30
We are resuming coverage on YTL Power with a Buy rating and a price target of RM2.30, which is based on blended valuation of DFCF and SOP, indicating 22% upside potential. Risks to our forecasts are (1) foreign currency - if RM was to strengthen against the US$ and ? by 1 %, earnings would decline by 1.5% and, (2) renegotiation of PPAs - a 1 % decline in power tariffs and energy sold could lower earnings by 0.6% and 1%, respectively.
Merrill Lynch (Malaysia)